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The Adaptive Business

There are companies that have managed to achieve long term success because they adapt to continually changing circumstances while maintaining the ability to execute brilliantly. General Electric, IBM and Johnson & Johnson come to mind. A more recent example is Microsoft, although the jury may still be out on that one.

These companies have an ability to consistently reinvent themselves in the face of changing competitive demands. IBM started out as an adding machine company and eventually became the premier mainframe computer manufacturer. Now it has become basically an information technology services provider. While GE is still an industrial conglomerate, it has also managed to diversify successfully into financial services.

The key is that they internalize the dynamic creativity of the marketplace. They have their eyes open for change, and then they have the processes and leadership to transform these into opportunities. Even more important though, is that they have found a way to hedge their bets without necessarily betting the farm, all while maintaining ongoing businesses and operations.

I would like to propose a process for adapting and innovating in the face of change and that can be summarized in four steps. This process is based on the decision-action cycle that the military uses to understand its situation and environment and then to decide and act.

Observation. This is the process of observing the environment for trends or changed circumstances. A company must be capable of looking at threats and converting them into opportunities. This requires a disciplined approach to analyzing the company’s situation, including its external and internal environments. At all levels of the organization, managers and employees must look for changes and deduce what they are most likely to mean for the company or the organization. This leads to the creation of initiatives to leverage those changes.

Orientation. This is the process of relating what has been observed with one’s current situation. A company that has determined that a change is afoot in its environment must orient itself, it must relate that change to its own strategy and operations. Will it fit? If not, then the leadership of the company must decide whether or not to proceed with the initiative. This step also includes determining the likely ease of implementation as well as expected costs and benefits. An idea can look good initially when it is first considered, but in the Orientation step, it can be determined that it is simply too far a stretch, or too risky, to undertake.

Decision. This is the pivotal step in the process, because it involves a careful consideration of the risks and opportunities inherent in pursuing the initiative. The key is to look closely at the initiative or project with a view to determining the best and worst case scenarios, as well as the critical factors that would lead to either one. This encourages a dispassionate weighing of the risk-reward ratio for the idea. For instance, an idea to create a new distribution strategy may present high potential returns, but there may b still too great a possibility that they wouldn’t materialize. Management must decide whether the risks can be managed or whether it is a gamble. Assuming prudent risk is a virtue, but taking on extreme risk for insufficient or unclear rewards is simply foolhardy.

Action. This is the final step in the adaptive sequence we have been examining. It involves careful planning to ensure that implementation can go forward with efficiency and effectiveness. There are many ways of planning an initiative, but I personally favour an approach that comes from the project management field: the Logical Framework Approach. This method allows the implementers to situate the initiative within the wider operational or strategic context of the business. It also provides a method for identifying the objective measures of progress, the means for gathering these and, perhaps most important, the critical conditions to ensure that the initiative can succeed. Thus, there is a ready-made structure for planning the work, as well as built-in performance measurement and risk management.

Once implementation is underway, the performance measures and critical conditions can be used to measure progress and success. This launches a new sequence of the decision-action cycle as management observes the results of previous action in order to determine further threats or opportunities.

This is but a brief overview of an approach for building an adaptive and innovative organization. While it is essential that the senior management of a company master these skills, it is also critical that they be present at all levels of the organization. Not all adaptation and change leadership needs to be strategic. Small changes can be very beneficial in terms of increased profitability, innovation at the margins, and a sense of participation by all the firm’s contributors.